Fed holds rates in July 2025 meet, despite 2 dissenting votes

31 Jul 2025 , 09:28 AM

WHAT THE DATA POINTS TELL US?

It was clear that Jerome Powell was justified in his stance, from a data flow perspective. The US June CPI inflation had come in 30 bps higher at 2.7%, while the Q2 GDP data bounced back from -0.5% in Q1 to 3.0% in Q2. This broadly syncs with Powell’s argument that the Q1 GDP contraction was largely due to front-loading of imports. The PCE inflation data will be released late on July 31, 2025 along with the personal consumption expenditure numbers. Last month, personal consumption showed pressure, but even if that was to continue, the Fed would have acted only in September. In its July statement, Powell refused to commit about the possibility of rate cuts in September 2025.

WHAT WE READ FROM JULY 2025 FOMC STATEMENT

Amidst the turf war between Trump and Powell on the trajectory of Fed rates, here is what we read from the July 2025 FOMC statement.

• The decision to maintain status quo on rates was passed by a vote of 9:2. Two senior Fed governors; Chris Waller and Michelle Bowman felt that the time was ripe to embark on rate cuts. They felt there was too much inflation paranoia and next few months could see impact on labour data, if rates were not cut.
• The Q2 GDP turned around sharply to 3.0%, from -0.5% in Q1. This bounce came from a reversal of the import surge in Q1, underlining Jerome Powell’s perspective that the first quarter GDP contraction was due to front-loading of imports. The eventual GDP growth may stabilize at levels lower than 3.0%.
• Last year, the first rate cut came in September 2024 and by December 2024, Fed had cut rates by 100 bps. However, it has been status quo since then. Jerome Powell feels that the reciprocal tariffs would have a bigger impact on inflation, than on GDP. Dissenters at the FOMC believe that inflation would be one-time impact.
• Powell was categorical in his July statement that there was no assurance of rate cut in September and it would be subject to data flows. The reciprocal tariffs on several countries kicks off from August 01, 2025; which is when the full impact of the tariffs on inflation will be felt. Powell has reserved his monetary arsenal for an eventuality.
• The markets had been expecting hints about a rate cut in September. However, post the Fed statement, the CME Fedwatch probability of rate cut in September fell sharply from 66% to 41%. It will depend on how US prices react to reciprocal tariffs. For now, Fed will remain focused on managing inflation expectations, above all else.
• Recent data flows show that much of the inflation impact has been coming from sticky core inflation, even as food and fuel have trended both ways. The core inflation, itself, was an outcome of tariffs and shipping disruptions; which had impacted global supply chains. It remains to be seen how Fed interprets it.

Between now and the September Fed meet; there is the all-important Jackson Hole meet in Wyoming. That normally drives Fed strategy.

FED POLICY WILL BE MODESTLY RESTRICTIVE FOR NOW

Jerome Powell has coined an interesting phrase to describe his approach to monetary policy; calling it “modestly restrictive.” Reacting indirectly to Trump’s continued jibes, Powell underlined that Fed was purely focused on controlling inflation and ensuring price stability. Government borrowings or home mortgage costs were not the Fed’s lookout. As Powell rightly put it, the real challenge for the Fed is not the tariffs, but the total uncertainty over how these tariffs will eventually impact growth, jobs, and inflation.

PROBABILITY OF SEPTEMBER RATE CUT FALLS SHARPLY

The CME Fedwatch captures probabilities of rate moves at each upcoming Fed meet.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	41.2%	58.8%
Oct-25	Nil	Nil	Nil	Nil	Nil	Nil	15.0%	47.6%	37.5%
Dec-25	Nil	Nil	Nil	Nil	Nil	9.7%	36.0%	41.0%	13.3%
Jun-26	Nil	0.3%	3.0%	12.0%	25.1%	30.2%	20.8%	7.6%	1.1%
Dec-26	2.1%	6.2%	14.4%	22.9%	24.9%	18.2%	8.6%	2.3%	0.3%

Data source: CME Fedwatch

For 2026, we have only considered two milestone meetings of June 2026 and December 2026. Here is what we read.

• It now looks like rate cuts are unlikely in September meeting, with the probability of a September 2025 rate cut falling sharply from 66.5% to 41.2% since the June Fed meet.
• As of December 2025, there is a 46.7% probability that rates would be cut by at least 50 bps. The likely scenario now is just 1 rate cut of 25 bps in 2025.
• As of December 2026, there is 88.8% probability of 2 additional rate cuts in 2026; but this could be based on an optimistic assumption of back-ending rate cuts.

CME Fedwatch is hinting at just 1 rate cut in 2025 and 2 more rate cuts in 2026. However, macros are still too uncertain to take a long-term call with any degree of confidence!